Investing in Africa - The Highs and Lows

Part 1 of Three Thoughts on Africa: Finance, New Media and Culture, Where to go this year and next year.

This is the first piece of a column I will be managing (contributions most welcome - especially from those going on spring break treks!)

While your friends in North American-focused alternative investments may be weeping over the woeful returns in 2008, check with their African counterparts and they will quickly remind you of what a killing they are making from investments in Nigerian banks and Namibian mining companies. While I smacked my lips at the fat returns on the Ghanaian stock exchange for 2008 (two stocks I had been tracking, Enterprise Insurance Corp and Ecobank Ghana, were up 141% and 125% for the year), I was envious of those who had placed their bets on a small paper company, Super Paper Products Company, whose share price was up a whopping 203% for the year.

Before I rushed to rebalance my portfolio, I paused to reflect on some of the lessons from Silber's Finance class and the ongoing credit-crisis-cum-recession: the promise of great rewards has its attendant risks, and African markets are no exception. For one, I looked woefully as liquidity simply evaporated from the markets. On January 2, only 35,014 shares were traded on the Ghana Stock Exchange, with a total value of $24,124… and yes, those are nominal dollars at the applicable exchange rate on the same day, no zeros have been lopped off nor is there some other numerical trick as has become the fad these days. While turnover was up significantly (187% during 2008), I was quite surprised to find out from my broker's publication that one stock accounted for 72% of volume and 73% of value traded in 2008.

On the other side of the Continent, Kenya's top 20 stocks were down 48% in 2008, with only one gainer for the year, Equity Bank, up 17%. While Kenya was lauded in 2006 and 2007 as a top destination for investment dollars, the political strife of 2008 and the immediate flight of fast money from the country's capital markets also highlighted the risks of frontier markets to long-term investors: there's nothing like a free lunch, except for IPO plays when you can sell your subscribed stock within a week of the issuance!

The restive giant market of Nigeria was down 46% in local terms, and lost $23bn of market cap to close the year at $49bn. My prediction is that it will take a while to regain all those billions that were wiped out in a rout largely fueled by the country's dependence on oil, which accounts for 95% of FX earnings, 65% of government revenues, and 20% of GDP. Like other natural-resource rich economies in Africa, Nigeria is actively looking to broaden its revenue base and diversify its economy further.

So what are the prospects for investing in Africa in 2009? A panelists last Friday at the Global Business Conference's "Entrepreneurship in Frontier Markets: Financing New Business in Africa" panel had varied views on growth drivers for the continent in 2009 and 2010. One common theme was that the strong growth experienced by most countries will continue at a slightly abated rate, with exceptions being South Africa and one or two North African economies struggling to eke out 1 or 2% GDP growth rates. However, competition for Africa's resources from India, China, Europe and USA has the potential of driving more robust infrastructure development and investments in education, which should create jobs and spur even more innovation if well managed.

Thus the outlook remains positive, and while investment vehicles on the continent may not be as complex as in the US, valuations on African markets are looking quite attractive and will most likely offer some pop this year. The benefits of diversification have shrunk considerably as correlation in equity markets has increased globally. All the same, African markets are worth serious consideration for investments and data for intelligent bar blast conversations.